One of the biggest areas of change within this year’s budget surrounded pensions. The aim was to improve choice and flexibility whilst removing unpopular elements from the past. What transpired was a genuinely big shift in policy that is due to be implemented from the 6th April 2015 following consultation. In the meantime interim measures have been actioned. Before discussing the relative merits let us run through exactly what the proposals are;
- Under capped drawdown, the allowance has been increased from 120% to 150% of the equivalent annuity (income for life) rate. This effectively allows anyone to withdraw a larger proportion of their pension provision on an ongoing basis
- For those with a secured pension of at least £12,000 per annum they will now be able to have complete flexibility on how much income they withdraw and when through flexible drawdown
- Under the rules of triviality, for those over 60 with total pensions assets valued under £30,000 they have the option to withdraw the full amount as a lump sum. Also, for everyone else over 60, a maximum of 3 pensions worth up to £10,000 each can be withdrawn
- There is now no requirement to purchase an annuity
For all of the above the tax treatment remains the same as at present. Therefore, 25% of a pension pot can be taken tax free whilst the remainder is taxed at one’s highest marginal tax rate. These rules become effective as of the 27th of March 2014.
- Lifetime allowance will again be reduced, this time to £1.25 million from £1.5 million, from the 6th of April 2014. Any excess pension savings will be taxed at current rates, that is 55% for any lump sums and an additional 25% on any ongoing income
From April 6th 2015 the planned pension system will allow the following;
Currently, you can only withdraw a maximum of 25% of your pension pot as a lump sum. Any amount in excess of this is charged at 55%. Under the new proposed rules the excess will be charged at your marginal tax rate. For many, this will be 20%. The government predicts that there will be a high uptake of this option which will result in a windfall for them.
- Qualified non UK pension schemes (QNUPS) are to be brought into line with UK registered pension schemes. This is designed to remove the opportunity provided by QNUPS to avoid inheritance tax
- Abolish age 75 rule thereby allowing those over 75 to make a pension contribution and claim tax relief
- Minimum retirement age set to increase in line with State Retirement Age. This will lead to the minimum age rising from 55 at present to 57 from 2028 when the policy will be introduced
Due to the increased flexibility offered under these proposals the government is considering ways to reduce pension transfers from defined benefit (final salary) pension schemes, which are likely to be unaffected by the changes, to defined contribution (money purchase) schemes. As public sector schemes are mainly unfunded this could be very costly for the government. Even private sector final salary schemes could have a big impact on the government’s finances due to their obligation to buy government debt (gilts) to cover their guarantees. These reasons point to a high chance that it may become difficult to transfer pensions out of such schemes come 2015. This could, in particular, effect some non UK residents who may wish to transfer their pension to a qualified recognised overseas pension scheme (QROPS) or equivalent.
Although the new pension rules are undoubtedly good news, especially for those who wish more control over their savings, the government don’t make radical changes unless it is in their interest. We should therefore consider how the government benefits and, importantly, what this means for us? The following are the benefits to the government from this initiative;
- An additional £1 billion is expected to be raised in the 2018/2019 tax year
- The divide between pensions and individual savings accounts (ISAs) will now be less distinct
- The pension changes combined with the announced increased ISA limits paves the way for a merging between these two savings vehicles. This could allow for costly tax relief on pensions to be removed
- Following on from the above, there are talks of limiting tax relief in future to the basic rate (20%) for all contributions. This would be the first step in abolishing it completely
Considering these points it is necessary to be fully aware that with the increased proposed choice comes higher responsibility. It is more important than ever to make correct financial decisions thereby ensuring one’s pension lasts the course. The whole premise of a pension system was to ensure that the savings pot accumulated provided income throughout retirement. The new proposed rules changes this and the fundamentals of a pension system. One should therefore take control, where possible, of their wealth and manage it accordingly. Those who do this successfully will truly benefit by tailoring how they withdraw money from their pensions to their lifestyle requirements.
Finally, for non UK based individuals, although the key benefits of QROPS remain it will be important to act quickly if they hold defined benefit pension schemes. As mentioned, the option of changing from a final salary scheme may not be open to them after April 2015. Whether this type of transfer is beneficial depends upon each individual’s requirements. As such, please contact us for further information on the best course of action available to you.
Update: New UK pension rules have been announced giving further clarity including confirmation of a reduction in death tax rates. Further consultation, however, is ongoing regarding specific rule changes for QROPS.
Information collated from numerous sources including HMRC.